In November of 2009 I posted a commentary on the Supply Chain Matters blog noting the special significance of Geely Holding Group’s attempts to acquire Volvo. I noted that in my view, this would be a very shrewd move by Geely, for a number of business, marketing and supply chain related perspectives.
After months of drawn out speculation a deal has now concluded and the $1.8 billion acquisition of Volvo, previously owned by Ford Motor Company, was consummated this week by Geely. The business media has been providing various different perspectives regarding this acquisition. A Wall Street Journal article (paid subscription may be required) notes that Geely Chairmen Li Shufu plans ” to leverage relatively cheap labor costs in China to radically slash Volvo’s costs in areas of product development and manufacturing. At the same time, he hopes to use Volvo’s upscale reputation to boost sales by the brand in China. “ Articles in the European focused Financial Times call attention to rather dismal track records when one foreign buyer buys another, particularly when a noted European brand is involved. The Times further notes that on paper, the deal makes good business sense but Chinese car makers still trail the world in technology, development, service and world class quality.
Regardless of speculation, I believe that Geely’s move can still be business savvy. Let’s once again review the perspectives. First, Geely now inherits a well respected global brand in the premium automotive category, one with a stellar reputation for building solid and rather safe automobiles. Volvo’s engineering and safety expertise helped Ford refine its vehicle line-up, and Geely’s management should encourage Volvo’s management teams to assist in refining Geely’s product lineup, especially in the context of developing world-class export vehicles. This acquisition of Volvo can also place Geely directly into the competitive race for attracting upscale auto buyers in China.
Second, Geely inherits both a manufacturing presence in Europe, but also distribution channels in both Europe and North America to not only provide Volvos, but future Geely brand vehicles as well. Volvo, in-turn, can gain the benefit of Geely’s knowledge of the Chinese automotive market and channels of distribution. Geely has ambitious plans to make Volvo’s more appealing to the most discriminating and wealthy Chinese buyers. The acquisition of Volvo can place Geely directly into this competitive race for attracting evolving upscale auto buyers in China. In the short term however, Geely needs to quickly figure out how to move a lot of finished Volvo’s sitting on dealer lots.
The third benefit lies in deployment of a high-volume global production and efficiency value-chain for producing Volvo vehicles. Geely’s plans call for building a new Volvo plant in China capable of producing 300,000 vehicles per year, and also leverage China’s advantages in material and labor costs. Chairmen Shufu has laid out an aggressive plan to nearly double annual global sales to over a million vehicles n the next five years. The company further indicates that it will maintain Volvo’s current manufacturing capacity in Europe to distribute to both European and U.S. markets. My speculation is that once Geeley’s Chinese manufacturing and Chinese value-chain capabilities are ramped-up and matured, that facility can be the focal point for exporting Volvo’s to other Asian countries. If Geely’s management is smart, they should seek to leverage a worldwide supply chain business planning and responsiveness capability.
Finally Geeley now acquires an outlet to introduce and market autos in the U.S. without having to overcome U.S. government or consumer perceptions regarding Chinese auto companies taking over from the U.S. big three. Consumers tend to have short memories, and Volvo buyers are a loyal group. If Geeley can maintain Volvo’s engineering and safety standards, build in additional quality, and produce in a far more efficient manner, than consumers will overcome their political objections. That’s exactly what happened with every other foreign based brand that successfully entered the U.S. market.
Geeley’s plans are both bold and shrewd, and could provide strategic advantages from a business and value-chain perspective. But the potential for risk and slip-ups also exist. The current ongoing quality crisis effecting Toyota is an important learning for Geely. Expand too fast, beyond the capabilities of consistent quality and market responsiveness, and your brand may be in jeopardy. Shielding decision making input within a closed Asian based hierarchy of management culture is also a risk.
Future developments will tell the complete story of whether all of the strategy and operational execution will fall into place for Geely.
What’s your view? Can Geely rise to the challenge for being a world-class automotive manufacturer by balancing the capabilities of Volvo?